Unlocking India’s Bond Market: A Daring Move for Global Investors
India’s $1.3 trillion sovereign debt market has recently caught the attention of global investors, serving as a lucrative magnet. However, this fascination also sheds light on the challenges that come with doing business in the complex landscape of the world’s most populous country.
Foreign investors are enthusiastically purchasing bonds ahead of their addition to JPMorgan Chase & Co’s primary emerging market debt index, effective from this Friday. Yet, navigating the Indian market poses obstacles, from lengthy documentation processes to intricate trade settlements and tax complexities.
Unlike China, which extended concessions like tax exemptions to investors before inclusion in major debt indexes, Indian authorities have not followed suit. This cautious stance stems from past experiences of hot money flows that triggered the Asian financial crisis.
“It’s still a very difficult market to access, requiring a lot of documentation,” remarked Jae Lee, a portfolio manager at The TCW Group in Los Angeles. “There are also variations in tax treaties, impacting net returns on India bonds based on the investor’s domicile.”
India initiated efforts in 2019 to secure access to bond indexes, aiming to reduce funding costs and bolster demand for its bonds amid record borrowings during the pandemic. This led to the opening of a segment of the sovereign bond market to overseas investors.
To engage in direct trading of Fully-Accessible Route (FAR) bonds, eligible for JPMorgan’s index, foreign funds must undergo a registration process for each account through a custodian. This registration procedure in India can be cumbersome due to paperwork requirements.
Despite the challenges, global funds have poured roughly $10 billion into FAR bonds since the announcement of index inclusion in September, indicating that logistical hurdles are not deterring investors. Goldman Sachs Group Inc forecasts an additional $30 billion inflow to India over the next ten months.
While taxation agreements with several countries allow some investors to benefit from lower rates, India’s withholding tax rates remain higher compared to some emerging market bond index members, as outlined in JPMorgan’s report.
Reflecting on China’s moves to ease access and taxation for foreign institutions in its bond markets, India stands firm on its protocols. Rahul Jain, a partner at Khaitan & Co, highlighted the importance of tax treaties in determining applicable tax regimes for non-residents investing in India.
As India’s bond market gains traction, foreign ownership is expected to nearly double in the next year, according to JPMorgan. The market reception has been positive, despite operational challenges noted earlier by the bank.
In the evolving landscape of India’s bond market, global investors navigate a unique set of hurdles, underscoring the intricacies of engaging with one of the world’s key financial markets.
